Microsoft patent infringement case a blow to large tech companies

U.S. businesses are being hurt by a plethora of bad patents. That, at least, is the view of major software and IT firms that suffer from a storm of infringement suits—and must fight an uphill battle to prove any patent is invalid.

According to longstanding legal doctrine, invalidity must be proved by more than just a preponderance of evidence. The party asserting that a patent is invalid must prove its case by clear and convincing evidence.

This high standard properly defers to the expertise of the U.S. Patent and Trademark Office (USPTO), the courts have explained.If the agency has determined a patent is valid, its well-informed opinion should not be rejected lightly.

But what if a defendant uncovers evidence of invalidity that the USPTO did not consider? The defendant still must satisfy the clear and convincing standard, the Federal Circuit held in its 1983 ruling, Connell v. Sears, Roebuck & Co.

That rule was put in jeopardy in late 2010 when the Supreme Court granted certiorari in Microsoft Corp. v. i4i Ltd. Experts widely expected the court would weaken the clear and convincing standard, at least for evidence not considered by the USPTO.

“That would have drastically altered patent infringement litigation,” says Christopher Larus, a partner in Robins, Kaplan, Miller & Ciresi. “It would have substantially undercut the value of patents and made the ability to enforce those patents much more unsure.”

But that didn’t happen. When the Supreme Court handed down its decision June 9, it unanimously upheld the existing clear and convincing standard.

The ruling was a major victory for supporters of strong patent rights, including chemical, biotech and pharmaceutical firms. And it was a big blow to Microsoft and other large IT firms. But it wasn’t a total defeat because the ruling suggests some significant new limits on the clear and convincing standard.

Growing Problem

The lawsuit began as just another infringement suit brought against a major IT firm. A small, Canadian firm, i4i, filed suit in 2007 alleging that Microsoft infringed its patent on a software editing tool within Microsoft Word 2003 and 2007.

Microsoft claimed i4i’s patent was invalid because the Canadian firm had violated the on-sale bar, 35 USC §102(b); more than one year before i4i had filed for its U.S. patent, i4i’s predecessor company had sold software in the U.S. incorporating the claimed invention.

Because the USPTO hadn’t known this, Microsoft argued, the clear and convincing standard should not apply. The district court rejected this argument. In 2009, a jury found Microsoft guilty of willful infringement and awarded i4i $240 million.

Microsoft appealed to the Federal Circuit, but the panel upheld the Connell rule—that the clear and convincing standard applies to all evidence of invalidity. And because of interest, the amount Microsoft owed grew to $290 million.

The company appealed again, and the Supreme Court granted certiorari. Many experts anticipated the high court would overturn Connell because it established a bright-line standard in patent cases, and the Supreme Court had repeatedly rejected such inflexible patent standards in recent years. Moreover, the Supreme Court had undermined the rationale of Connell. The court stated in the 2007 case of KSR Int’l Co. v. Teleflex Inc. that when evidence of invalidity has not been considered by the USPTO, “the rationale underlying the presumption [of validity]—that the USPTO, in its expertise, has approved the claim—seems much diminished.”

Standard Upheld

When the case reached the Supreme Court, however, things went wrong again for Microsoft. The solicitor general, whose opinion often influences the high court, came out in favor of the clear and convincing standard. Microsoft shifted its legal argument and pushed for a bigger change in the law, which many observers say hurt the company’s case (see “Shifting Gears”).

In the end, the Supreme Court upheld the existing clear and convincing standard by a vote of 8-0. (Chief Justice John Roberts, who owns Microsoft stock, recused himself from the case.)

Writing for eight members of the court, Justice Sonia Sotomayor noted there were policy arguments for and against the clear and convincing standard—including the argument mentioned in KSR—but concluded that the judiciary could not address these arguments. “Congress specified the applicable standard of proof in 1952 when it codified the common-law presumption of patent validity,” Justice Sotomayor wrote. “Any recalibration of the standard of proof remains in its hands.”

Justice Sotomayor, however provided a caveat. If evidence of invalidity was not considered by the USPTO, the agency’s “considered judgment may lose significant force.” So a jury can be instructed that such new evidence makes it easier for a challenger to satisfy its burden of providing clear and convincing proof of invalidity.

Such instructions are unlikely to have much effect, according to many experts, because juries often misunderstand the clear and convincing standard. “Simply because there’s a dispute over validity, the jury may conclude the evidence is not clear [and wrongly uphold a patent’s validity],” says Prof. Joshua Sarnoff of DePaul University College of Law.

Alternative Measure

Justice Stephen Breyer added another wrinkle. He wrote, in a concurrence joined by two other Justices, that the clear and convincing standard applies only to questions of fact, such as “when a product was first sold or whether a prior art reference had been published.” The clear and convincing standard, he declared, is not used when one applies the law to given facts, such as whether the facts show an invention is novel or nonobvious.

“The majority did not contradict this,” says Prof. Rochelle Dreyfuss of NYU School of Law, so lower courts may attempt to limit the clear and convincing standard to purely factual issues concerning invalidity. That, however, will be difficult to do, according to Dreyfuss. “Separating legal from factual issues will be a real bear.”

Rather than have juries struggle with the proper application of the clear and convincing standard, experts anticipate that an increasing number of businesses will assert their invalidity challenges in inter partes re-examinations. These administrative proceedings are conducted before the USPTO and are decided by a simple preponderance of evidence.

However, these proceedings allow a patentee to repeatedly modify its patent claims so as to avoid claims of invalidity. This moves “the goal posts in a way you can’t in litigation,” says Prof. Arti Rai of Duke University School of Law. As a result, these administrative proceedings can run for “years and years,” she explains. “It takes even longer than trial court litigation.”